Patent Exhaustion Principles Apply To All Authorized Transfers Of Title In Property Regardless Of Whether The Transfer Constitutes A Gift Or Sale

In LifeScan Scotland, Ltd. v. Shasta Technologies, LLC, No. 13-1271 (Fed. Cir. Nov. 4, 2013), the Federal Circuit reversed an order granting a preliminary injunction blocking sales of blood glucose test strips for use in LifeScan Scotland, Ltd. and LifeScan, Inc.'s (collectively "LifeScan") blood glucose meters because Shasta Technologies, LLC; Conductive Technologies, Inc.; Instacare Corp.; and Pharmatech Solutions, Inc. (collectively "Shasta") established the defense of patent exhaustion.

U.S. Patent No. 7,250,105 ("the '105 patent"), owned by LifeScan, describes and claims an improved method of comparing the measurements taken by two separate electrodes embodied in LifeScan's meters. LifeScan distributed 60 percent of its meters through healthcare providers who gave it to patients for free, and LifeScan sold the remaining 40 percent below cost. LifeScan admitted to using this form of distribution with the expectation that it would derive a profit from customers purchasing its test strips for use in its meters. Shasta only competes with LifeScan in the test strip market, and Shasta's test strips are designed for use in LifeScan's meters.

LifeScan filed suit against Shasta alleging indirect infringement of the '105 patent and also sought a preliminary injunction barring Shasta from selling or offering to sell its competing test strip. As a defense, Shasta argued that the preliminary injunction should not issue because the sale and distribution of LifeScan's meters exhausted LifeScan's patent rights because the meters substantially embodied the '105 patent. The district court found that the preliminary injunction factors favored LifeScan because the transfer of meters either by sale or gift did not exhaust LifeScan's rights since the meters did not embody the claims of the '105 patent. Accordingly, the district court issued the preliminary injunction, and Shasta appealed.

On appeal, LifeScan argued that distribution of its meters, whether by sale or gift, did not trigger exhaustion because its meters did not substantially embody the claims of the '105 patent. At the outset, the Federal Circuit noted that because the asserted '105 patent claims were method claims, the issue is governed by the Supreme Court's decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). In Quanta, the Supreme Court "stated that it had 'repeatedly held that method patents were exhausted by the sale of an item that embodied the method.'" Slip...